The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The Euro, the US Dollar, and the Canadian Dollar ended up as the best performers, while the Sterling went for a wild rise, initially boosted by Brexit positive headlines only for the market to realize there wasn’t much to chew on as I elaborate in today’s report, leading to the market to revert the entire move back down. Meanwhile, the AUD was punished in response to the unambiguous clarification by RBA Goveor Lowe that lower interest rates in Australia will be a consideration to make in the next June meeting. The Kiwi, highly correlated to the AUD, followed the aggressive sell side action in the AUD in locksteps as market participants now anticipate further easing measures by the RBNZ too. Lastly, the Japanese Yen, judging by the fluctuations in equities or fixed income, continues to trade under excessive supply effects, defying Intermarket flows logic.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- The public speech by RBA Goveor Lowe on Tuesday, aimed partly at clarifying the monetary and policy stance by the Central Bank, alongside the RBA minutes published hours earlier, implies that the prospects for an interest rate cut in Australia in June a highly probable outcome.
- Lowe was very explicit, saying that “at our meeting in two weeks’ time, we will consider the case or lower interest rates”, which has been subject to labor market conditions improving. The market is building up the case for two 25bp rate cuts this year.
- The Australian Prudential Regulatory Authority (APRA) removed its guidance on Australian mortgage lenders, used as a reference to assess repayment obligations by borrowers. The relaxation on the approach led to some speculation of less need for the RBA to lower rates, but RBA Lowe was quick to downplay the impact on the independent rate decision by the RBA.
- The Kiwi is one of the hardest-hit currencies following RBA Lowe’s hint on lower rates, with the market now expecting the RBNZ to implement another 25bp rate cut in coming months.
- The US commerce department has granted US telecoms a 90-day temporary license to conduct business operations with Huawei. It means that among other developments, Google will be able to proceed with the software updates to Huawei phones using the Android operating system. The market interpreted the news as a positive input for risk with US equities rising.
- However, there is new evidence that China is ready for a protracted cold (trade) war. In an article published by the South China Moing Post, it reports that Chinese President Xi Jinping has called for a ‘new Long March’, which suggests China is up for a long fight. Xi Jinping said: “We are now embarking on a new Long March, and we must start all over again.”
- The Sterling saw buying interest retu on early speculation that the UK Cabinet had discussed giving MPs a free vote on a 2nd Brexit referendum. However, the clarification that such a scenario would only be possible upon approval of May’s Withdrawal Agreement threw immediate cold water on the optimism that had been built. The latest round of new proposals by PM May to attempt a successful vote early June has been met with high skepticism.
- Fed’s minutes of the May 1st FOMC meeting will be released this Wednesday. As a reminder, on May 1st, Fed’s Chair Powell tamped down expectations of a rate cut this year. However, the disagreements between the US and China have re-ignited the odds of a cut. The minutes may contain limited information of relevance this time around as the Fed re-assesses the global risks outlook considering the anticipation of a protracted trade war with China.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The improvement in risk dynamics is evident by the bullish slopes in the S&P 500, both micro and macro, even if one must be respectful of the fact that the hourly structure still remains bearish. In the fixed-income space, the US 30y bond yield has gone up to the top of its weekly range circa 2.85%, which considering the fluid situation between the US and China, appears to be a fairly rich valuation. The DXY, through its price action, reveals bullish clues. The reason being is because a sudden aggressive supply candle was reverted back up in what’s often described as a V-shape rebound. Whenever this occurs, it’s a sign of underlying strength as setbacks are met by excessive demand pockets, hence sellers scramble to build acceptance, likely caused by outstanding unfilled limit orders. When it comes to the Yen, the bearish price action continues to really defy normal logic, which is why for hedging purposes, it starts to look very attractive to accumulate JPY longs to be hedged against longs on the ES or US30y, as the disparity between equity/stocks vs JPY performance widens. In terms of Chinese assets, USD/CNH continues to find a higher area of acceptance through the balanced achieved above the 6.93 bullish breakout point for more than 3 days now. As long as the Chinese Yuan remains with a bearish outlook, the risk profile should be relatively subdued. Lastly, the junk bonds and the VIX are on the verge of risk-friendly breakouts as both trades near the edges of its most recent balanced areas, which would encourage a further rise in equities.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Range Expansion Eyed, Sellers Weak-Handed?
GBP/USD: Bounce Met With Supply Excess
USD/JPY: En-route To Next Projected Target At 110.80-85
AUD/USD: RBA Shifts Exchange Rate Bias To The Downside
USD/CAD: A Highly Messy Affair As Bottom-Side Liquidity Tested
- Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
- Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
- POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
- Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
- Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
- Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
- Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
- Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection